1. (SBU) Embassy warmly welcomes CODEL McGovern to Ecuador
on November 8-13. Your visit comes at a time of
opportunities, risks, and changes as Ecuador prepares for
national and local elections in 2009 following approval of a
new constitution. While we do not agree with the Correa
government on every issue, we share many interests and have
enjoyed strong cooperation on development and
counter-narcotics programs. Our objective is to continue a
productive U.S. partnership with Ecuador.

Domestic Political Developments
-------------------------------

2. (SBU) Ecuador has been a fragile democracy caught in
cycles of political instability, reflecting popular
disillusionment with traditional power structures and weak
institutions. Inaugurated in January 2007, Rafael Correa won
the presidential election by successfully presenting himself
as the "change" candidate. He is the first president since
the 1979 return to democracy to enjoy sustained popularity in
all regions of the country and among a broad array of class
and demographic groups.

3. (SBU) A core element of Correa's political program was
convoking a Constituent Assembly to draft a new constitution,
Ecuador's 20th. Nearly 64% of voters approved the
constitution in a September 28 referendum. Proponents
believe it will give citizens a real voice in government
decisions and expand guarantees of rights. Critics claim
that it will centralize power in the Executive and
drastically increase government spending.

4. (SBU) Ecuador is now in a period of transition while
institutions are established in accordance with the new
constitution. The Constituent Assembly reconvened in October
to appoint three interim bodies: a legislative commission,
an electoral council, and an electoral disputes tribunal.
All but one of the former Supreme Court justices selected by
lottery for what is now a smaller and less powerful National
Court refused to serve, which leaves the court vacant for the
time being. General elections will be held during the first
half of 2009.

Economic Outlook and Policies
-----------------------------

5. (SBU) Ecuador's economic performance has been solid since
it adopted the dollar as its currency in 2000, following a
major banking crisis and recession in 1999. Growth has been
supported by the stability brought by dollarization, high oil
prices, strong domestic consumer demand, increased
non-traditional exports, and growing remittances. Per capita
income increased from $1,296 in 2000 to $3,366 in 2007, and
the poverty rate fell 51% in 2000 to 38% in 2006. Economic
growth declined in 2007 to 2.5%, due in part to declining oil
production, but also uncertainty about the direction of
economic policy under the Correa Administration. Looking
forward, the economy could be vulnerable if petroleum prices
remain at or below current prices for an extended period,
although in the short-term the economy will be buffered by
the current budget surplus and the government's cash
reserves, plus sizable international reserves.

6. (SBU) President Correa entered office looking to make a
number of changes to the economic system in Ecuador and
address a number of unmet social needs. His government has
increased income transfers to the poor and increased spending
on health education, and basic infrastructure, although given
weak government institutions it has been slow in implementing
some of these programs. The overall direction of economic
policy under the Correa Administration is difficult to
define, in part because there are often differences between
Correa's public discourse - which can be populist - and his
policy decisions - which are often more pragmatic. The
Correa Administration is strengthening government regulation
over certain sectors and increasing the government's revenue
from sectors such as petroleum and mining, but the government
appears intent on maintaining an important role for the
private sector even in these strategic sectors.

7. (SBU) The new constitution envisions a strong role for
the state in the economy, although a number of important
provisions, such as identifying strategic sectors and
including a social dimension to the definition of property,
have parallels in the previous constitution. Many of the
economic provisions in the new constitution will have to be
further clarified by implementing legislation, which the
government is just beginning to present to the interim
legislative body.

Economic Ties with the U.S.
---------------------------

8. (SBU) The United States is Ecuador's most important
trading partner, accounting for 48% of its exports and 25% of
its imports. The Andean Trade Preferences Act (ATPA), which
Congress extended until December 2009, has helped promote a
number of new, labor-intensive export industries Ecuador,
such as flowers and processed vegetables. The Government of
Ecuador estimates that ATPA supports 350,000 jobs in Ecuador.
U.S. companies and individuals have invested in a wide range
of Ecuadorian industries. Investors in regulated sectors
such as petroleum and electricity have a number of investment
disputes, while those in more lightly regulated sectors have
had relatively few disputes. The United States and Ecuador
have a bilateral investment treaty, and several U.S.
investors have filed for international arbitration under the
treaty.

Ecuador Foreign Policy
----------------------

9. (SBU) President Correa has sought to establish or
strengthen relations with a wide variety of countries, such
as China, Iran, Spain, Russia and Chile. His goal is to
strengthen South American institutions, such as the Union of
South American Nations (UNASUR) and the Community of Andean
Nations (CAN), and to expand Ecuador's political and
commercial partners. He has explicitly expressed a desire to
reduce dependence on the United States.

10. (SBU) President Correa remains unwilling at this point
to reestablish diplomatic relations with Colombia, except on
his own terms, despite ongoing mediation efforts by the
Organization of American States. The latest exchange of
harsh words beginning on October 27 between Correa and Uribe
has once again frozen the process. Correa believes that
Uribe lied to him concerning the Colombia incursion into
Ecuador, and his pride and focus on national sovereignty have
thus far impeded the kind of reconciliation that Chavez and
Uribe achieved. Despite the break in relations, commercial
ties remain strong and consular operations continue in both
countries.

Northern Border
---------------

11. (SBU) Ecuador shares a 450-mile porous border with
Colombia. USG efforts in the area aim to prevent spillover
of drug cultivation and trafficking and illegal armed group
activity into Ecuador. They include development assistance
to improve the quality of life and spur licit economic
growth; counter-narcotics aid to curb smuggling of precursor
chemicals, cocaine, and heroin; and military-to-military
assistance to strengthen Ecuador's ability to secure its
Northern Border and control its territorial waters.

12. (U) The UN High Commissioner for Refugees (UNHCR)
estimates there are at least 180,000 persons of concern in
the northern provinces of Ecuador who have fled Colombia due
to violence or threat of violence. In FY 2008 and 2009, the
State Department provided funding for refugees in Ecuador to
UNHCR, the International Organization for Migration (IOM),
the World Food Program, the International Committee of the
Red Cross, and the American Red Cross. UNHCR carries out
direct assistance projects to foster development, while IOM
focuses on emergency assistance and local capacity building.

13. (SBU) The Ecuadorian Military's Fourth Joint Task Force
(formerly Fourth Army Division) has engaged the FARC in a
series of operations along the border since last November and
has notably increased its presence with additional personnel
and assets. These operations demonstrate resolve and
coordination and commitment of assets by the Ecuadorian
military to control its border. The Fourth Joint Task Force
has taken the lead in efforts to control the Northern Border
area and to remove incursions of armed insurgents within its
territory by increasing the intensity of operations. The
United States has supported these Ecuadorian military
efforts. The Ecuadorian government's policy has been to
refrain from labeling the FARC as terrorists and to maintain
a neutral position on Colombia's internal conflict to avoid
becoming a target of FARC attacks.

Counter-Narcotics Cooperation
-----------------------------

14. (SBU) Ecuadorian leaders have identified narcotics
traffickers and other criminal organizations as threats to
national sovereignty, and are focusing the police, military,
judiciary and others on disrupting and dismantling these
organizations. Since 2001, the Embassy's Narcotics Affairs
Section (NAS) has provided almost $94 million to enhance the
capacity of the anti-narcotics police throughout Ecuador,
assist the military in providing security for citizens and
protecting Ecuador's sovereignty on the northern and maritime
borders, and improve the criminal justice system. The
Military Group has also provided an additional $18 million to
the Ecuadorian Military to enhance its operational capacity
in the northern border region. There have been recent cuts
in NAS funding, down to just over $7 million in 2008 from
nearly $20 million in 2004. Cooperation, however, remains
strong under the Correa administration, with an increased
level of programs and activities and many successes in
interdictions.

15. (SBU) The Manta Forward Operating Location (FOL) is an
important asset in our regional counter-narcotics efforts.
Embassy efforts over the past two years to educate the
Ecuadorian public about the FOL and its benefits have reduced
misperceptions and negative views, especially in Manta
itself, but were complicated by the March 1 Colombian
incursion into Ecuador. On July 29, the GOE sent a
diplomatic note notifying the U.S. that it will not extend
the agreement when it expires on November 11, 2009. The
United States is now planning its withdrawal from the
facility.

Development Programs
--------------------

16. (U) The U.S. Government has supported Ecuador's
development since 1942, working especially through USAID in
education, health and family planning, environment,
agriculture, micro-enterprise, and economic growth. USAID's
2008 funding was $18 million, and $23 million in 2007.
Current programs focus on cooperation with national and local
governments to improve stability and livelihoods, democratic
governance, environmental management, and economic growth.

17. (U) USAID's Peace and Security program along the
northern and southern borders aims to increase employment and
income, strengthen local governments, and improve the
production and marketing of local business clusters. By
September 2007, 489,000 inhabitants of the southern border
and 500,000 inhabitants of the northern border benefited from
new bridges, water and sewage systems, garbage recycling,
irrigation and roads. Incomes for most participating farmers
have more than doubled, and approximately 11,000 new jobs
have been created.

18. (U) USAID's broader poverty reduction program promotes
trade and competitiveness, and encourages civil society and
the private sector to participate in economic reforms. USAID
created the Committee for Territorial Economic Development to
give small and regional enterprises, joined in a &network of
networks8 a voice in national policies. The policy work is
linked to support to small enterprises to improve their
quality and access to credit and new markets.

19. (U) Under democracy and governance, USAID has supported
56 local governments to implement participatory planning
processes and improve their municipal management practices.
More than 10,000 persons from vulnerable groups have had
access to defense services and legal assistance in nine
cities; and the application of the criminal justice system in
Cuenca has been improved. More than 10,000 volunteers have
actively participated in the oversight of local and national
elections.

20. (U) Ecuador is one of the most biologically diverse
countries in the world, so USAID's environmental programs
focus on management of the National System of Protected
Areas, indigenous territories, watersheds, and coastal
lowlands and mangroves. The program seeks to create economic
benefits for communities in and around protected areas,
providing the means and motivation for better conservation.

21. (U) In addition, USAID has programs in the following
areas: combating Trafficking in Persons; promoting the
participation of persons with disabilities in economic
activities and democratic processes; supporting Centers of
Excellence for Teacher Training; and assisting in disaster
preparedness and response.
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